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Nontaxable Investment Income

Understanding Income Tax

New Jersey’s State animal is the horse.

Taxable Debt Obligations ..................................................................................................................................... 2

Gain or Loss From Sale .......................................................................................................................................... 2

Qualified Investment Funds ................................................................................................................................. 2

Nontaxable .................................................................................................................................................................................................. 2

Taxable .......................................................................................................................................................................................................... 3

Mutual Funds ......................................................................................................................................................... 3

Unit Investment Trusts ......................................................................................................................................... 3

State Tuition Program Accounts ......................................................................................................................... 4

State 529A Achieving a Better Life Experience (ABLE) Accounts ..................................................................... 4

Taxability of Federal and New Jersey Debt Obligations ................................................................................... 5

Federal Securities ...................................................................................................................................................................................... 5

Bonds Issued by New Jersey Authorities ......................................................................................................................................... 7

Reporting Nontaxable and Taxable Debt Obligations ...................................................................................... 8

Residents...................................................................................................................................................................................................... 8

Nonresidents .............................................................................................................................................................................................. 8

Connect With Us. ................................................................................................................................................... 9

GIT-5
January 2023

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                        Nontaxable Investment Income 

                                   Understanding Income Tax 

 Most investment income is taxable in New Jersey as  interest, 

 dividends, or capital gains. 

 However, some interest income is exempt from tax, including:                                       

 •      Interest and gains from government debt obligations (such as bonds) of the State of New Jersey or its 
        political subdivisions. These subdivisions can include municipalities, counties, school districts and 
        authorities; 

 •      Interest and gains from debt obligations of the federal government, such as U.S. Savings Bonds and 
        Treasury Bills; 

 •      Certain distributions from New Jersey Qualified Investment Funds. (See definition below);  

 •      Distributions from mutual funds on interest earned from federal debt;  

 •      Earnings  on distributions from qualified State tuition programs. This includes the New Jersey  Better 
        Educational Savings Trust (NJBEST) program; and 

 •      Earnings on tuition savings programs formed under Section 529A of the Internal Revenue Code. This 
        includes the State’s Achieving a Better Life Experience (ABLE) program. 

 Taxable Debt Obligations  

 Interest and gains you receive from debt obligations of other states and local governments are taxed by New 
 Jersey and must be reported on yourresident return ornonresident return.  

 Gain or Loss From Sale 

 When determining your capital gains or income from selling securities, do not include income or gains from debt 
 obligations (bonds) that are exempt from New Jersey tax. You also cannot deduct losses from sales of exempt 
 bonds when calculating net gains or losses on Schedule NJ-DOP, Form NJ-1040 (or Part I, Form NJ-1040NR). 

 Qualified Investment Funds 

 Nontaxable 
 Distributions and gains from a New Jersey qualified investment fund are exempt from State Income Tax if they 
 are derived from the qualified nontaxable debt obligations held by the fund. 
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Nontaxable Investment Income

Understanding Income Tax

A qualified investment fund must:

• Be a regulated investment company;

• Invest 80% or more of its funds (other than cash or receivables) in securities that are exempt from New
Jersey Income Tax; and

• Complete and retain Form IF-1, Certification of Qualified Investment Fund, to document its status. This
certification does not need to be filed with us, but must be made available upon request.

Taxable
A fund may hold up to 20% of its investments in debt obligations that are taxable. You must report the portion
of the fund’s distributions and gains that are derived from taxable investments as dividends and/or capital gains
(as indicated on your Form 1099) on your New Jersey Income Tax return.

Funds that are considered a New Jersey qualified investment fund must notify shareholders by February 15 about
the nontaxable portion of their distribution. Contact your broker to determine if you own part of a qualified
investment fund for New Jersey Income Tax purposes.

Mutual Funds

Distributions received by shareholders of mutual funds are subject to New Jersey Income Tax as dividends and/or
capital gains, unless the fund is considered a qualified investment fund for New Jersey purposes (see Qualified
Investment Funds). However, distributions that are attributed to interest earned on federal debt obligations are
not taxable regardless of whether they are held by a qualified investment fund.

Unit Investment Trusts

A unit investment trust is a fund with a fixed number of units, which means a portfolio of securities such as stocks
or bonds that does not change. This differs from certain mutual funds in which portfolio managers periodically
buy and sell investments to enhance the fund’s returns. The trust also expires after a specific period of time,
unlike most mutual funds. Investors receive their share of the assets when the trust is terminated. Interest from
the trust is exempt from New Jersey Income Tax, provided the investments of the trust consist of nontaxable
debt obligations.

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January 2023

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            Nontaxable Investment Income 

             Understanding Income Tax 

 State Tuition Program Accounts 

 Nontaxable 
 Earnings on qualified distributions from qualified State tuition program accounts, including the New Jersey Better 
 Educational Savings Trust (NJBEST) accounts, are exempt from New Jersey Income Tax.  

 Taxable 
 Earnings from qualified State tuition program  accounts, including NJBEST accounts,  are taxed if they are 
 considered nonqualified distributions.  

 State 529A Achieving a Better Life Experience (ABLE) Accounts 

 Nontaxable 
 Earnings on distributions from qualified State 529A ABLE program accounts are exempt from New Jersey Income 
 Tax.  

 Taxable 
 Earnings from ABLE accounts are taxable if they are reported as nonqualified distributions on your Form 1099.  

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                              Nontaxable Investment Income 

                                      Understanding Income Tax 

 Taxability of Federal and New Jersey Debt Obligations 

 The partial list below shows whether interest or gains from federal or New Jersey securities are taxable (T) or 
 exempt (E).  

                                           Federal Securities 
   Security                                                   Interest Capital Gain 
   Asian Development Bank                                     T        T 
   Bank for Cooperatives                                      E        E 
   Certificate of Accrual on Treasury Securities (CATS)       E        E 
   EE Bonds (Series EE)                                       E        E 
   Environmental Financing Authority                          T        T 
   Export-Import Bank of the United States (“Eximbank”):                
   Series 1978–B Debentures                                   E        E 
   Participation Certificates                                 T        T 
   Farmers Home Administration                                E        E 
   Federal Deposit Insurance Corporation Obligations          E        E 
   Federal Farm Credit Systems Obligations                    E        E 
   Federal Financing Bank                                     E        E 
   Federal Home Loan Bank                                     E        E 
   Federal Home Loan Mortgage Corporation                     T        T 
   Federal Housing Authority (F.H.A.)                         E        E 
   Federal Intermediate Credit Banks                          E        E 
   Federal Land Banks                                         E        E 
   Federal National Mortgage Association (Fannie Mae):                  
   Guaranteed Participation Certification                     T        T 
   Interest on Bonds and Debentures                           T        T 
   Federal Savings and Loan Insurance Corporation Obligations E        E 
   General Services Administration                            E        E 
   Government National Mortgage Association (Ginnie Mae)      T        T 
   Guam                                                       E        E 
   H & HH Bonds (Series H & HH)                               E        E 
   H.U.D./New Communities                                     E        E 
   H.U.D. Public Housing Notes and Bonds:                               
                               
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                                Nontaxable Investment Income 

                                 Understanding Income Tax 

                                 Federal Securities (continued) 
  Security                                                 Interest  Capital Gain 
  If issued in New Jersey                                  E         E 
  If issued in other states                                T         T 
  If issued in D.C., Puerto Rico, or the Virgin Islands    E         E 
                                                           
  Inter-American Development Bank Bonds                    T         T 
  International Monetary Fund and Bank for Reconstruction             
   and Development (World Bank)                            T         T 
  Jonathan Development Corporation (Obligations                       
   Guaranteed Under New Communities Act of 1968)           T         T 
  Merchant Marine                                          E         E 
  Panama Canal Zone Bonds                                             
   (exempt under 31 U.S.C. 744 & 745)                      E         E 
  Production Credit Associations                           E         E 
  Puerto Rico                                              E         E 
  Puerto Rico Water Resources — 4.2% bonds due 1/1/89 —               
   Interest on Bonds                                       E         E 
  R.F.K. Stadium Bonds                                     T         T 
  Small Business Administration                            E         E 
  Student Loan Marketing Association (Sallie Mae)          E         E 
  Tennessee Valley Authority                               E         E 
  Treasury Investment Growth Receipt (TIGR)                E         E 
  U.S. Postal Service                                      E         E 
  U.S. Treasury                                            E         E 
  U.S. Treasury Bills (T-Bills)                            E         E 
  USAVE Certificates—Farmers Home Administration                      
   Insured Loan Notes                                      Partially – 
  Virgin Islands                                           E         E 
  Washington Metropolitan Area Transit Authority Bonds     T         T 
                                 
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                              Nontaxable Investment Income 

                                      Understanding Income Tax 

                              Bonds Issued by New Jersey Authorities 

  Name of Authority                                    Interest      Capital Gain 

  Convention Hall Authorities                          E             E 
  County and Municipal Sewerage Authorities            E             E 
  County Improvement Authorities                       E             E 
  County Solid Waste Disposal Financing                E             E 
  County Solid Waste Management Authorities            E             E 
  Delaware Memorial Bridge                             E             E 
  Delaware River and Bay Authority                     E             E 
  Delaware River Joint Toll Commission                 E             E 
  Delaware River Port Authority                        E             E 
  Economic Development Authority                       E             E 
  Educational Facilities Authority                     E             E 
  First Class County Recreation Authority              E             E 
  Hackensack Meadowlands                               E             E 
  Health Care Facilities Financing Authority           E             E 
  Highway Authority (includes Garden State Parkway and                
   Cape May-Lewes Ferry)                               E             E 
  Incinerator Authorities                              E             E 
  Industrial Pollution Control Financing Authority     E             E 
  Municipal Utilities Authorities                      E             E 
  New Jersey Building Authority                        E             E 
  New Jersey Expressway Authority                      E             E 
  New Jersey Housing Finance Agency                    E             E 
  New Jersey Mortgage Finance Agency                   E             E 
  New Jersey Turnpike Authority                        E             E 
  Parking Authorities                                  E             E 
  Port Authorities                                     E             E 
  Port Authority of New York and New Jersey            E             E 
  Sanitary Sewer District Authorities                                 
   of 1st and 2nd Class Counties                       E             E 
  South Jersey Port Corporation                        E             E 
  Sports and Exposition Authorities                    E             E 
                               
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                          Nontaxable Investment Income 

                             Understanding Income Tax 

 Reporting Nontaxable and Taxable Debt Obligations 

 Residents 
 Nontaxable Debt Obligations. You must report nontaxable interest income on line 16b, Form NJ-1040.  

 Taxable Debt Obligations. You must report on Form NJ-1040:  

  • Taxable interest income on line 16a; 

  • Taxable dividends on line 17;  

  • Taxable net gains on line 19 and/or line 4, Schedule NJ-DOP. 

 Nonresidents 
 Nontaxable Debt Obligations. Do not report nontaxable obligations on Form NJ-1040NR. We do not require 
 information on these obligations with a nonresident tax return. 

 Taxable Debt Obligations. You must report on Column A of Form NJ-1040NR: 

  • Taxable interest income on line 16; 

  • Taxable dividends on line 17; 

  • Taxable net gains on line 19 and/or line 68, Part I, Form NJ-1040NR.  

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                             Nontaxable Investment Income 

                                 Understanding Income Tax 

 Connect With Us. 

 Email your State tax questions; 

 Visita Regional Information Center; 

 Call (609) 292-6400; 

 Subscribe to our NJ Tax Alert E-News; 

 Follow us on:  

 The forms and amounts referred to in this Bulletin are those for Tax Year 2022. This document is designed to 
 provide guidance to taxpayers, and is accurate as of the date issued.  
  
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